With commodity prices, including those of steel, crashing in the second half of 2008, expectations from companies such as Steel Authority of India Ltd, or SAIL, were running low. So even though the company reported a 62% drop in operating profit, hardly any-one was negatively surprised. In fact, some analysts had expected the core operating performance to be worse.
Steel prices declined by around 20% last quarter compared with the September quarter, but as far as raw material prices go, the company is still locked into long-term contracts entered into at close to peak-of-the-cycle prices, especially in the case of imported coking coal. Worse still, the sharp depreciation in the rupee hurt its import bill further. There would evidently be a huge drop in profitability. To be precise, operating profit margin fell from 31.3% in the year-ago December quarter to 12.7% last quarter.
Also See Tough Environment (Graphic)
There has been a positive surprise on the employee costs front, with the company maintaining them at year-ago levels. In the first six months of this fiscal, staff costs had jumped by 81% to make provisions for wage revisions that were due from January 2007. It seems much of the provisions required had already been made by the company at the peak of the cycle, when profit generation was high.
The company also gained in the area of other income, which jumped by 77% to Rs555 crore, thanks to the high interest rates prevailing in the market last quarter. Other income contributed to as much as 44% of profit before tax, compared with just 14% in the first two quarters of this fiscal year.
Unlike the extreme situation the Indian steel industry faced in October when sales practically came to a standstill, things have improved now, at least as far as volumes go. Price realizations continue to be under pressure and the cost of coking coal would still be high, but the overall performance in the March quarter is likely to be better than the December quarter.
The tough environment in which steel companies are now operating is well captured in SAIL’s share price, which has declined to one-fourth of its levels in January 2008. At its current price, the company is valued at just four times earnings, reflecting the apathy investors now have towards commodity stocks.
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Graphics by Ahmed Raza Khan